7/28/2009 @ 6:36PM

Derivatives Come To The Stadium

The sports ticketing business seems to be getting crazier by the day. There’s the primary market, where teams sell directly to fans. The secondary market, where ticket holders scalp the seats to those who got shut out, has grown exponentially since StubHub and other online services made it easier. And now there’s the “pre-primary” market, where fans lay out money for an option to buy tickets, to be ultimately exercised or re-sold to a third party.

You’ve heard of personal seat licenses? Call these temporary seat licenses–the right to buy rights to a seat until a week before game time. It’s the brainchild of Chris Pappas, an options trader on the Chicago Board of Trade, who figured that the principals of options trading could play a role in the world of consumer purchases as well as in the securities markets. His Web-based company, OptionIt, got a patent for its options trading ticket service two years ago, and is now launching its first partnerships with three major sports teams: the NFL’s Baltimore Ravens and Buffalo Bills and the NHL’s San Jose Sharks.

Three months ago, Pappas, armed with $2.5 million in start-up financing from family and friends, hired as chief executive Mark Mastalir, a former
Wrigley
and
Nike
executive and a one-time senior director of business development with the NBA. He’s charged with convincing team executives that fans will go for the convenience and low cash outlay associated with buying seat options for games they’d like to attend but don’t know in advance if they’ll be able to.

“At the end of the day, we hope to prove our model,” says Mastalir, who expects to announce more team partnerships soon, mainly in the NHL and NBA. He doesn’t figure to penetrate Major League Baseball’s ironclad resale agreement with StubHub.

The idea goes something like this: A fan interested in buying a $100 ticket to a Bills game who finds the box office sold out can pay $50 months in advance for the option to buy one of the seats set aside by the team for OptionIt. If he decides to go, he can exercise the option and buy the seat, for a final cost of $150. That price, the team figures, is still below what the fan would have had to fork over to a scalper. He could also choose to sell the option to someone else, bearing the risk of the option’s price fluctuation in the interim (should the Bills win several games between the option’s purchase and the date it’s good for, the option price should rise on stronger ticket demand; if the team stumbles, the price will probably fall. That could mean a healthy options market for speculators making early bets on a successful season).

Sports business experts are skeptical. “A fun concept, but not much of a business proposition–the margins are just too small,” says Chicago-based industry consultant Marc Ganis, who notes there have been a few iterations of the service in the past that were tried and failed.

The difference this time around, though, is the direct involvement with teams. Ganis says problems included the failure of some past services to actually deliver the tickets to those holding the options. With teams now setting aside allotments for OptionIt, that should change. Still, multiple factors from team performance to weather could affect the value of ticket options, possibly making them too volatile for fans to deal with.

OptionIt plans to make money by evenly splitting the initial option purchase with the team, and by taking a small cut each time the option trades afterward. “Look at FIFA [World Cup],” says Mastalir. “Tickets could change hands a dozen times before the tournament starts.”

The Bills are moving slowly with the service, testing the waters with 500 seats a game. The Ravens and Sharks are putting up even fewer seats.

Perhaps the biggest risk: The model is predicated on high ticket demand, with resale prices going for more than face value. When secondary prices drop below face value, which has often been the case in this year’s economy, option prices would drop along with them, stifling demand for them.

Mastalir, as he expands, plans to deal with the slow economy by limiting his firm’s involvement to where pockets of high demand still flourish. An agreement with the attendance-challenged New York Islanders, for example, might include just the handful of match-ups with the rival Rangers.

“We have to pick our spots,” he says. Of course, that would bolster Ganis’ contention that margins are too small to support modest volume. Unless the company can hang on until the next bull market for sports tickets.